Attorneys general talk the State of the Trolls

Patent trolls beware. State attorneys general from around the country have donned their armor and picked up their swords, ready to slay the beasts that they claim threaten our economy.

At the heart of the issue is the term “patent troll” itself. There are those who see it as unnecessarily pejorative, and prefer other, more neutral terms. Among the alternatives are non-practicing entities (NPE) or patent-assertion entities (PAE). But no matter what name you give these companies, critics contend that they exist merely to snatch up a portfolio of patents to use as ammunition for lawsuits, rather than innovate or create anything new.

It’s this behavior that has caught the attention of state attorneys general around the nation. These attorneys general believe that the increasing frequency of patent litigation suits is draining money from their states and hampering growth and development in local businesses.

Sorrell’s first salvo

While most people know the Green Mountain State for its maple syrup and ski slopes, Vermont has the distinction of being the first state to really tackle the issue of patent trolls head on. Vermont Attorney General William Sorrell targeted a well known and active NPE, MPHJ Technology Investments, LLC, accusing the company of engaging in “unfair and deceptive acts by sending a series of letters to many small business and non-profit organizations in Vermont. The letters threaten patent litigation if the businesses do not pay licensing fees,” the attorney general states in a consumer protection complaint.

Sorrell first learned of the patent troll problem from coverage on National Public Radio and in The New York Times, and soon afterward he was “asked to attend a meeting with representatives of a number of tech-savvy companies in Vermont, along with the state secretary of commerce,” he explains. “They advised that patent trolling was a real problem for them.” The companies asked if Sorrell’s office would participate in efforts to make Vermont a jurisdiction that is not friendly to patent trolls. Soon afterward, independent of this meeting, Sorrell’s office received a series of complaints—close to 100—from small businesses and non-profits that had received one or more demand letters from MPJH and/or a firm that represented it.

This behavior, according to Sorrell, was clearly a violation of the Vermont Consumer Protection Act. The act prohibits unfair and deceptive acts and practices in commerce in the state, and Sorrell’s office gathered enough information to indicate a clear violation of the law. Sorrell points out that MPHJ has 40 or so shell corporations under its umbrella, and some small businesses in Vermont received three letters from MPHJ and its law firm, though some businesses only received the second or third letter and not the first.

While the state of Vermont has issues with trolls, it does not wish to dismantle the patent system entirely. “One of the things you have to realize,” Sorrell explains, “is that Vermont is not anti-patent. IBM is one of the largest employers in the state, and IBM has received the most patents of any company year in and year out for a number of years, so we wanted to make sure that we are not trying to attack the legitimate exercise or enforcement of patent rights.” Instead, the state legislature passed a law entitled “Bad Faith Assertions of Patent Infringements,” which Sorrell believes will give his office a new statute in addition to the existing consumer protection act. This new arrow in his quiver will help the state deal with these kinds of issues and give Vermont companies who are victims of bad faith infringement suits a basis for fighting back.

Nebraska follows suit

After Vermont started the ball rolling, other state attorneys general decided to take an aggressive stance toward these NPEs. In Nebraska, Attorney General Jon Bruning took a slightly different tack. He decided to take on the firm representing the alleged troll rather than the troll itself.

Bruning set his sights on Farley Daniels LLP, the Texas-based law firm that had been issuing demand letters on behalf of various entities, such as Activision TV, alleging infringement claims. Bruning then accused Farley Daniels of presenting infringement assertions that are “unsubstantiated and contain false, misleading or deceptive statements,” which, he asserts, is a violation of the Nebraska Consumer Protection Act.

The threat of “patent trolls” first came to Bruning’s attention when he began receiving complaints from small businesses and non-profits in his state, and through conversations with colleagues such as Sorrell.

It did not take him long to decide that this sort of activity constituted a real problem for the people and businesses of the state of Nebraska. “We believe this is a scam,” Bruning says. “This behavior violates consumer protection laws.” While he believes in the rights of legitimate patent holders, Bruning points to the bullying tactics of patent trolls who frighten and extort money from small businesses that are not legally sophisticated.

Bruning saw Farney Daniels as the “hub of the wheel of the scam.” A district court ruled that Activision TV had the right to be represented by the Texas firm. Bruning clarified that the “investigation was never about Activision or their right to counsel. We have no problem with Farney Daniels representing Activision, but with the patent troll activities associated with Farney Daniels.” The firm also represents MPHJ Technologies, a company that also features prominently in Minnesota Attorney General Lori Swanson’s efforts to stop patent trolls.

Like Sorrell, Bruning emphasizes that Nebraska is not anti-patent. “I have no problem with legitimate holders of patent rights,” he says, but harassment by these trolls, whose behavior impacts both Fortune 500 companies and small businesses alike, make this a consumer protection issue and not a patent issue.

Teamwork, according to Bruning, will be a key component to solving this problem. “It’s a bipartisan issue. Consumers everywhere will come together and work in concert to stop this scam,” he says. “I am optimistic that there is momentum in Congress as well.”

Meetings of the minds

Both Bruning and Sorrell see the benefits of spreading the word about the patent troll problem. Bruning foresees the need for a “multiple-front attack,” including a bipartisan, multi-state coalition of attorneys general and legislative changes at both the state and federal level.

Sorrell agrees and sees the benefit of spreading the word, “not just in Vermont, but elsewhere, that this is wrong.” He too hopes that the federal government will stand up and amend the law to make it more difficult for this business model to succeed.

Their efforts, along with those of other attorneys general such as Martha Coakley of Massachusetts and Chris Koster of Missouri, could lead the way toward finding a solution to the patent troll problem on a state level, even as the federal government considers a number of IP reform bills currently on the table.

As Sorrell puts it, “I want to encourage other states to do what Vermont has done and is doing, or be part of a discussion on the federal level. I want to play that role. I can be of assistance in that effort to make things better.” And, working together, perhaps slay the trolls once and for all.